02.25.2019 Desert News
Canopy's cloud-based tax platform aiming for market dominance
LEHI — The view from Canopy's gleaming new office in the foothills west of I-15 near Point of the Mountain affords a view of Adobe's expanding facilities, and a host of other more newly minted Utah tech headquarters that dot the near horizon.
The elevated vantage point may be the perfect metaphor for the company, founded in 2014, that is working to disrupt the world of accounting with a suite of cloud-based applications aiming to raise the bar on the role of technology in a market that's been, well, a little slow to adapt.
Canopy founder and CEO Kurt Avarell said the company's latest product, aimed at optimizing the tax preparation process for professional accountants, will be the first new piece of prep software for the sector that's come along in quite a while.
"It's the first time in two decades that tax preparation (software) has been introduced into this market," Avarell said. "So, there’s a lot of hype across the accounting community and a lot of people paying attention, because this is very unusual."
People started paying attention to, and utilizing, Canopy's first foray into the tax world a few years ago when it released a tool aimed at improving and automating the niche accounting area of tax resolution. That's accounting-speak for the process of navigating tax debt issues raised by the IRS. Avarell said that first product was a "wedge" intended to allow the new company to break into the market.
"We wedged in with the tax resolution product and built a good customer base," Avarell said. "It was classic Clayton Christensen (Harvard Business School pioneer in disruptive business strategy) disruption. We entered at the low end of the market with tax resolution, and we're now entering the much bigger market with tax preparation."
Avarell is a tax attorney who, while a California native, studied at BYU. He said he comes from a family of entrepreneurs and had previously started, built and sold another company, but had a career segue that took him to a marquee Wall Street law firm. It was while he was at the 150-year-old firm of Milbank, Tweed, Hadley & McCloy that the seeds of an idea that would lead to Canopy were sown.
"It was while doing pro bono work at Milbank that I recognized a problem that needed to be addressed," Avarell said. "I was working with low-income taxpayers and the process, that should have become easier each time we did it, took just as long because of the volume of paperwork required by the IRS.
"The amount of time required was startling … and I realized automation would change everything."
So Avarell walked away from a job that might be considered a once-in-a-lifetime opportunity by many in the legal community and, instead of climbing the corporate ladder, taught himself how to code and launched Canopy from a familiar location for tech startup efforts: his basement.
Canopy's products are moving tax preparation from a realm that once meant, according to Avarell, "finding and assembling all your paperwork, hauling it to your accountant's office and waiting to hear something back" to one where document exchanges are digital, business data can be processed to automatically populate necessary forms and the overall experience, for both preparers and taxpayers, can be evolved from one of constant stresses to relative ease.
Now Canopy has raised over $70 million in venture capital, has built its suite of tax preparation products to five categories and, this tax season, is beta testing its tax prep software. And it's winning over clients.
James Faughtenberry, founder and CEO of the Kansas City, Missouri-based ATA Group, a business consulting and tax preparation firm, said Canopy's tools have helped him both streamline his business and increase revenues.
"I’ve utilized Canopy in such a way that allows me to direct all of my business through Canopy," Faughtenberry said. "All of my client communications and project tracking are all in one place now, and it makes a huge difference."
"Switching to Canopy was a game changer. After less than three months of using the software, I had streamlined my processes so efficiently that I was able to add nearly $10,000 in monthly recurring revenue."
Canopy has also earned the attention of the Governor's Office of Economic Development and qualified last summer for a postperformance tax incentive package that could earn that company as much as $1.2 million in tax rebates over a five-year span.
The award is linked to Canopy's plans to add over 530 new employees in the next five years, estimated to generate some $150 million in new wages and, as a result of corporate, payroll and sales taxes, would also be contributing about $6.2 million in new state revenues over the same period.
Governor's Office of Economic Development Executive Director Val Hale lauded the company when the incentive package was announced last June.
"Canopy is a homegrown company that is rapidly growing and we are excited they have chosen to expand in Utah,” Hale said. “It’s great to see our Silicon Slopes thrive and find innovative ways to grow our tech economy.”
While Canopy's software-as-service business model is one that could be headquartered, really, anywhere in the world, Avarell said he loves Utah, has close ties here and believes it's the perfect place to start and grow a business.
"Two years after we started Canopy we were in a big hiring cycle and looking to add 150 new employees," Avarell said. "I was talking to an investor in the Bay Area and he made the comment that, 'The reality is you can’t build Canopy here in California. It’s not possible because it’s so prohibitively expensive to bring on that many people.'
"We were fortunate to be in a place where you have tens of thousands of students in the local universities and colleges, a very educated workforce and where doing business is friendlier and cheaper."
Avarell also noted that while the number of companies vying for top tech talent in Utah is continuing to grow, it is still a much better labor pool than in California's top tech hub in and around the Bay Area.
Avarell said Canopy's potential, with an addressable market measured in the tens of billions of dollars, is enormous. In 2017 alone, individuals and businesses filed a combined 245 million tax returns, leading to nearly $31 billion spent on tax preparation services.
"The total addressable market for Canopy is big, it's massive," Avarell said. "It's likely approaching $100 billion.
"I think we’ve just scratched the surface in terms of the product suite and what we can potentially offer."